Thursday, February 25, 2010

Geithner May Give Regulators Leeway in Applying Volcker Rule

Feb. 24 (Bloomberg) -- The U.S. Treasury Department wants to give regulators discretion to define proprietary trading as the White House tries to revive its plan to bar banks from making hazardous bets that could cause another financial crisis.

One month after President Barack Obama said firms “will no longer be allowed” to trade for their own accounts, officials say they need flexibility to avoid impairing the $7.2 trillion Treasury securities market.

Dealers who trade in government bonds on behalf of clients need to be able to maintain inventories in their firms’ own accounts to insure market liquidity, said Lee Sachs, a counselor to Treasury Secretary Timothy F. Geithner. “This measure is not aimed at anything having to do with customer business, market- making or hedging,” Sachs, a former senior managing director in charge of debt capital markets at Bears Stearns Cos., said in an interview.

The Obama administration is working with the Senate on legislation to forbid banks that take government-insured deposits from trading exclusively for their own profit or investing in hedge funds or private-equity operations. At the same time, proprietary trading will need to be defined in a way that doesn’t prevent banks from keeping their own trading accounts that may be used to offset customer bets or to ensure that securities are easily traded.

“Obviously some Treasury activity is necessary, and it is extremely hard -- impossible -- to distinguish between facilitating customer trades and proprietary trading,” said John Brynjolfsson, chief investment officer of Aliso Viejo, California-based Armored Wolf LLC, an investment management firm.

Opposition in Congress

The proposed ban on proprietary trading has met opposition in Congress, hampered by criticism that the administration waited too long and offered too few details.

Senator Judd Gregg, a New Hampshire Republican who is helping to write parts of the Senate’s regulatory overhaul bill, said in an interview yesterday that he thinks the administration is “having troubles getting their arms around it.”

The Treasury’s effort comes as the Senate Banking Committee prepares a new draft of regulatory overhaul legislation. Senator Christopher Dodd of Connecticut, the panel chairman, has been working on the bill while negotiating with Republicans on a range of issues, including whether to add a stand-alone consumer protection agency.

Obama named the Jan. 21 trading-ban proposal after its chief proponent, former Federal Reserve Chairman Paul Volcker, who is now chairman of the White House’s Economic Recovery Advisory Board.

Gibbs Comments

Asked if the Obama administration is softening its insistence on the Volcker rule, White House Press Secretary Robert Gibbs yesterday said, “absolutely not.”

“We’re not walking away from, and we’re not watering down that proposal one bit,” Gibbs said.

In negotiations with Congress, administration officials have focused on giving regulators the power to set limits and to design the program in a way that avoids market disruptions.

“Regulators have to be very careful to get this right,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York. “Daily trading activity adds tremendous liquidity to these markets. If you eliminate trading for the house account at the investment banks, you risk harming overall market liquidity and could do irreparable damage to the functioning of markets.”

The Treasury is financing a budget deficit that the White House earlier this month predicted will reach a record $1.6 trillion in the 12-month period ending Sept. 30. U.S. government borrowing will total a net $392 billion from January through March and $268 billion in the three months to June 30, the Treasury said Feb. 1.

Legislative Details

Congressional officials say the legislative details of the proposed proprietary-trading ban are still under discussion. “We’re continuing to consider the president’s proposal,” Kirstin Brost, a spokeswoman for Dodd and the banking committee, said yesterday.

Obama’s proposal builds on one element of the House of Representatives regulatory bill that passed last year. That measure, added by Representative Paul Kanjorski, would enable regulators to set limits on the size and scope of financial firms.

Kanjorski said yesterday that the Volcker rule “would be very helpful in stabilizing the system long-term,” in comments after his remarks at the Credit Union National Association conference in Washington.

Moving Along

“It is being pursued,” said Kanjorski, a Pennsylvania Democrat and a member of the House Financial Services Committee. “I would be probably optimistic that we’re going to move along.”

Treasury spokesman Andrew Williams said yesterday that “we continue to work closely with congressional members from both sides of the aisle.”

At a Feb. 2 hearing, Deputy Treasury Secretary Neal Wolin said the administration did not want the law to be too prescriptive. “Certainly a lot of the detail would be left over to specific application in the rule-making process or the advisory process,” Wolin told the Senate Banking Committee.

This week, Republicans continued to question whether additional legislation was needed for regulators to crack down on risky activity. Senator Richard Shelby, the top Republican on the banking panel, said it will be difficult to define proprietary trading in the legislation.

If regulators need additional powers, “we ought to look seriously at giving it to them,” Shelby said in a Feb. 22 interview. “It might just be a question of exercising the power they already have.”

-- With assistance from Ian Katz and Alison Vekshin in Washington. Editors: Brendan Murray, Christopher Wellisz

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